Steps to Build Credit
One of the most important things you can do when it comes to becoming more financially independent is to build your credit. The value of a reliable credit score can’t be overstated, and building that score takes time and dedication. In this article, we have outlined what a credit score really is and some of the best ways you can build your credit and improve your score.
The importance of credit
You may be wondering why you need to pay attention to your credit score. Building credit is valuable because a good score opens many doors in the financial world. The better your credit score, the more lenders are likely to give you credit in forms like credit cards or loans. According to Experian, one of the major credit bureaus, the credit score system is broken down into the following tiers:
- 300-579: Very Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
Most Americans have a credit score of at least 700, with anyone having a score of 670 or less being seen as a riskier borrower who may have difficulties acquiring a loan. That’s why it is important to raise your score as much as you can.
How a credit score is calculated
A credit score is determined by a system through the Fair Isaac Corporation, or FICO. Scores are calculated using five key categories, each with their own individual weight to the overall score:
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- New credit – 10%
- Credit mix – 10%
Contrary to popular belief, factors such as age, employment status or income are not factored into someone’s FICO credit score.
Building your credit score
With this in mind, you can weigh your financial choices carefully when building your credit while following these helpful tips:
1. Get a credit builder product – Consider obtaining some kind of credit-building product, like a credit card or a loan. If you never borrow money, there will be no way to calculate a credit score or for credit bureaus to determine what kind of borrower you are.
2. Make payments on time – Always try to make your payments on time, every time. Always pay at least the minimum, as missed payments will be recorded in your credit report. One way to help with this is to sign up for automatic payments so you never miss a deadline.
3. Watch your credit utilization – Use credit to build your credit score and do so responsibly by keeping your credit utilization low, if possible. Credit utilization is the percentage of your credit limit that you use. A good rule of thumb is to keep your credit utilization below 30%, as any higher percentage might begin to negatively affect your score.
4. Keep accounts open – Even if you don’t use a credit card anymore or as much as you used to, you should keep the account open. Closing accounts can have a negative impact on your credit and may negate some of the credit-building habits you’ve been working hard to build.
Checking your credit score
As you build your credit score, it is important to check it and your credit report often to ensure you are on the right track. Most credit bureaus offer a free credit report every year, and you may be able to obtain your credit score from credit card companies or financial institutions. Keeping a record of your progress can help you in making more informed decisions and in catching any mistakes that might affect your score in the long run.